U.S. executives pledge stock for loans, raise margin call concern
U.S. corporate executives and directors have pledged at least $15 billion of their own company stock holdings to secure personal loans, in spite of recent examples of these arrangements creating bigger losses for other investors during selloffs.
Most U.S. companies say they limit or prohibit stock pledging because they can increase downward pressure on a company’s stock price if an executive’s pledged shares are sold under duress, such as a margin call. Still, some boards make exceptions for their stars, corporate disclosures show. And they rarely disclose what these insiders are doing with their borrowed money.
Earlier this month, shares of Valeant Pharmaceuticals International (VRX.TO) fell 14 percent during a single trading session after 1.3 million shares of the company’s stock was dumped on the market in a margin call. Valeant CEO Michael Pearson had pledged the stock as collateral to secure loans from Goldman Sachs Group Inc totaling about $100 million.
The money partly financed contributions to Duke University and to help fund a community swimming pool, Pearson disclosed. His latest disclosed total pay was $10.3 million, according to Valeant’s proxy statement.
“Nothing good can come from these arrangements from a broader shareholder perspective,” said Mark Borges, a principal at Compensia, an executive compensation research firm in San Francisco. “When you pledge shares you are essentially giving someone else the ability to sell the stock out from under you. It exacerbates the situation when they are sold into an already anxious market.”
Oracle Corp (ORCL.N) founder and chairman Larry Ellison leads the pack with about $11 billion of company stock pledged for personal loans. The arrangement, which accounts for 7 percent of Oracle’s market cap, is reviewed every quarter by Oracle’s governance and compensation committees to ensure Ellison has enough money to pay off the loans without selling the pledged shares. Ellison’s latest disclosed total annual pay was $63.6 million, according to Oracle’s proxy statement. Oracle declined to comment.
A Reuters analysis of thousands of U.S. corporate disclosures shows that most of stock pledging activity is concentrated at Oracle, Tesla Motors Inc (TSLA.O), Estee Lauder Companies Inc (EL.N), FedEx Corp (FDX.N), AutoZone Inc (AZO.N) and by T. Boone Pickens at Clean Energy Fuels Corp (CLNE.O).
Tesla chairman and CEO Elon Musk has pledged 7.4 million shares of company stock to secure personal loans worth about $1.6 billion, according to company disclosures. Goldman Sachs and Morgan Stanley have been named as lenders in the arrangements with Musk. Tesla did not return messages seeking comment.
Tesla has warned investors in U.S. regulatory filings what could happen if Musk had to sell the shares.
“The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business.” Musk, who owns 35.53 million shares of Tesla worth about $7.6 billion, does not accept his annual salary of $35,360.
To be sure, there are some clear advantages to executives and directors using their stock as collateral for loans or for hedging purposes. Investment banks are eager to give them low cost loans, which allow the executives to diversify their holdings without selling their stock. The companies don’t disclose the rate of interest the executives pay on their loans. Executives can also defer tax gains into future years because there is no liability when a pledge of shares is executed.
“If they can’t pledge the stock, they might just sell the shares,” said Kevin McManus, vice president of proxy services at Egan-Jones Proxy Services. He said stock pledges are not necessarily a problem as long as executives’ share ownership meets company requirements and keeps them aligned with the interests of other investors.
At FedEx, there is a policy against pledging shares or using them for hedging transactions. But exceptions have been made for Chairman and CEO Frederick W. Smith, who has almost $700 million worth of company stock pledged to secure loans to fund his personal business ventures, FedEx has disclosed. Among other things, Smith backs a Los Angeles-based film production company called Alcon Entertainment, which counts “The Blind Side” among its financing and production credits.
The company said its general counsel and lead independent director granted Smith an exemption from its anti-pledging policy because he has shown he has enough financial resources to repay the loans without resorting to selling the pledged shares. Smith’s latest disclosed total annual pay was $13.8 million, according to a company proxy statement.
In 2013, the company defeated a shareholder proposal that would have banned all pledges. FedEx’s board said an absolute prohibition on pledging could create a disincentive for officers and directors to hold substantial amounts of FedEx shares for long periods.
J.R. Hyde III, a director at Autozone Inc (AZO.N), has pledged about $72 million worth of company stock for personal loans. But Hyde has assured the company in writing he has the financial capacity to avert a margin call, Autozone spokesman Ray Pohlman said. Hyde, who gets paid $200,000 as a director, owns 116,007 shares of company stock worth $89 million.
Ronald S. Lauder, chairman of Estee Lauder’s Clinique Laboratories, has pledged 10 million shares of company stock worth about $830 million to secure loans and his obligations under a prepaid variable forward sales contract. Estee Lauder declined to comment, but his forward sales contract typically would allow Lauder to obtain immediate cash in exchange for a commitment to surrender shares or cash at a predetermined future date.
Corporate governance experts say prepaid sales contracts can be a problem because they require an executive to take a short position on their own stock. Estee Lauder says it does not restrict stock pledges, but requires they be precleared by the company’s legal department. However, the company says its preclearance policy does not include stock pledged in margin accounts.